Macroeconomic Goal: Economic
Growth

Introduction

Review: What do we already know about Economic Growth?

From the 5Es lesson:

Economic Growth is one of the "5 Es of economics or one of the
five ways for a society to reduce scarcity.

Let's define Economic Growth as an increase in the ABILITY to
produce goods and services. This is not the way the term is normally
defined. Later this semester we'll discuss the various definitions of
Economic Growth, but here we'll use this more fundamental
definition:

Economic Growth is an increase in the ABILITY to
produce goods and services.

This means we are ABLE to produce more, but it doesn't necessarily
mean we do produce more. More on this later.

This type of Economic Growth is caused by:

a) more resources
b) better resources
c) better technology

If we only had more resources we could produce more goods and
services and satisfy more of our wants. This will reduce scarcity and
give us more satisfaction (more good and services). All societies
therefore try to achieve economic growth.

From Production Possibilities lesson - Economic Growth

In Macroeconomics we study three main issues:

Unemployment (UE)

Inflation (IN), and

Economic Growth (EG)

We can use the production possibilities model to demonstrate how
economic growth can reduce scarcity.

I like to call this increasing our ABILITY to Produce.
this is the definition we used in the 5Es
lesson. This is the most fundamental definition of economic
growth. It is the type of economic growth used on out 5Es diagram.

We can increase our ABILITY to produce goods and services (or
increase our POTENTIAL GDP) if we get:

more resources

better resources, and

better technology

Since this increase maximum output that we are able to produce
it shifts the PPF outward. On the graph below, economic growth
would cause the PPF to move from PP1 to PP2.

This doesn't necessarily mean that the economy IS producing
more, just that it CAN produce more. To achieve our new potential
levels of output we also need full employment and productive
efficiency. It could be possible to have this type of economic
growth so that we CAN produce the quantities represented by point
E, but if there is unemployment and productive inefficiency we
would be at a point beneath this new curve (maybe point C). So we
may get new resources or new technology so we CAN produce more
(point E on PP2), but if we don't use the new resources (i.e. we
have unemployment) or if we don't use the new technology (i.e. we
have productive inefficiency) , we may remain on PP1 (point
C).

(2) Increasing Output (or ACHIEVING our potential output)

The most commonly used definition of economic growth is simply
producing more. (Later we will call this INCREASING REAL GDP.)When an
economy increases its output it is often said to have achieved
economic growth. But if by producing more we are simply ACHIEVING OUR
POTENTIAL, then we could also say that it is REDUCING UNEMPLOYMENT or
ACHIEVING PRODUCTIVE EFFICIENCY. On our graph this would be
represented by moving from point D to a point on the curve: A, B, or
C).

(3) Increasing Real GDP per capita

The definition of economic growth used in our multimedia lesson on
economic growth (Macro_015.les) is an increase in GDP per capita.
This means increasing output per person. GDP per capita is calculated
by dividing output by the population.

From the AS - AD Lesson:

Economic Growth

What about economic growth? In an earlier lesson we
discussed three definitions of economic growth

Increasing our POTENTIAL OUTPUT

Increasing Output, and

Increasing Real GDP per capita

(1) Increasing our POTENTIAL OUTPUT

I like to call this increasing our ABILITY to produce.
This is the definition we used in the 5
Es lesson. This is the most fundamental definition of
economic growth. It is the type of economic growth used on our
5 Es diagram.

We can increase our ABILITY to produce goods and services
(or increase our POTENTIAL GDP) if we get:

more resources

better resources, and

better technology

Since this increases maximum output that we are able to
produce it shifts the PPF outward. On the graph below, economic
growth would cause the PPF to move from PP1 to PP2.

This doesn't necessarily mean that the economy IS producing
more, just that it CAN produce more. To achieve our new
potential levels of output we also need full employment and
productive efficiency. It could be possible to have this type
of economic growth so that we CAN produce the quantities
represented by point E, but if there is unemployment and
productive inefficiency we would be at a point beneath this new
curve (maybe point C). So we may get new resources or new
technology so we CAN produce more (point E on PP2), but if we
don't use the new resources (i.e. we have unemployment) or if
we don't use the new technology (i.e. we have productive
inefficiency) , we may remain on PP1 (point C).

In the AS-AD model INCREASING OUR POTENTIAL OUTPUT is
represented by in increase in AS.

Notice that when AS increases, the full employment level of
output increase from RDO-FE1 to RDO-FE2. this is an increase in
our potential level of output.

In the 5 Es lecture we said that economic growth is caused
by:

more resources

better resources, or

better technology

An increase in the production possibilities curve is caused
by having more resources, better resources, or better
technology.

An increase in AS is caused by:

a decrease in the price of resources

an increase in productivity

lower business taxes and government red tape

These are all really the same thing.

(2) Increasing Output (or ACHIEVING out potential)

The most commonly used definition of economic growth is simply
producing more. (Later we will call this INCREASING REAL GDP.)When
an economy increases its output it is often said to have achieved
economic growth. But if by producing more we are simply ACHIEVING
OUR POTENTIAL, then we could also say that it is REDUCING
UNEMPLOYMENT or ACHIEVING PRODUCTIVE EFFICIENCY. On our graph this
would be represented by moving from point D to a point on the
curve: A, B, or C).

On our AD-AS model we could illustrate this type of growth
(producing more) by an increase in AD.

Notice that output increase from RDO-EQUIL to RDO', but the
full employment level of output, which is our potential level of
output, does not change (RDO-FE).

If Ad increase so that equilibrium is at the full employment
level of output, it is analogous to going from a point inside the
production possibilities curve to a point on the curve.

(3) Increasing Real GDP per capita

The definition of economic growth used in our multimedia lesson on
economic growth (Macro_015.les) is an increase in GDP per capita.
This means increasing output per person. GDP per capita is calculated
by dividing output by the population.

Economic Growth: Three Definitions - REVIEW

1. Increasing our ABILITY to Produce (INCREASING potential
output)

a. "economic growth" on the 5Es chart
b. shifting out to a new production possibilities curve
c. ­AS
d. causes: